Reserve Bank of India (RBI) Governor Sanjay Malhotra indicated that further interest rate cuts are possible if inflation continues to moderate or if economic growth weakens.
Inflation’s Impact on Rate Decisions
The Governor’s statement follows a significant drop in India’s consumer price index (CPI) inflation, which hit a 77-month low of 2.1 percent in June, down from 2.82 percent in May. This notable decline provides more room for the central bank to consider policy adjustments.
Malhotra explained that the Monetary Policy Committee (MPC) continuously evaluates the economic situation and outlook. If the inflation outlook improves, or if growth figures are lower than anticipated, a rate cut becomes a clear possibility. He emphasized that the MPC will make its decision based on evolving data.
RBI’s Inflation Projections and Flexibility
The RBI had projected inflation at 3.7 percent for FY2026. However, Malhotra suggested that actual inflation might turn out to be lower than this forecast. If that happens, the monetary policy will certainly take it into account for future decisions.
The central bank has already been proactive. Since February 2025, the repo rate – the key policy interest rate – has been reduced by a total of 100 basis points. The latest cut in June brought the rate down to 5.50 percent.
Understanding the Neutral Stance
Alongside the rate cut, the MPC shifted its policy stance from “accommodative” to “neutral.” Governor Malhotra clarified that this neutral stance provides the RBI with flexibility. It means the central bank can move interest rates either up or down, depending on the future economic outlook, rather than being committed to a specific direction.
Balancing Growth and Price Stability
When asked whether moderating inflation or weaker growth would be the primary trigger for a rate cut, the Governor stated it would be a combination of both. He highlighted that the RBI’s core mandate is price stability, but it also considers economic growth as equally important. Therefore, both factors will heavily influence the MPC’s future decisions.
Policy Transmission and Other Reforms
Malhotra also touched upon the transmission of policy rate changes to the banking system. He noted that about 24 basis points of transmission had occurred on new loans by the end of May, and approximately 16 basis points on outstanding loans. This indicates that the rate cuts are gradually being passed on to borrowers.
Beyond monetary policy, the RBI is looking into other regulatory matters. This includes reviewing guidelines to clarify if foreign banks can hold up to a 26 percent stake in domestic Indian banks. The Governor affirmed that foreign banks should face no difficulty in holding such a stake with corresponding economic interest and voting rights.
However, when it comes to allowing conglomerates to obtain banking licenses, Malhotra expressed caution. He pointed out the potential for a conflict of interest when financial business and real economic activities operate within the same group.
- RBI Governor hints at further rate cuts if inflation moderates or growth weakens.
- India’s CPI inflation recently hit a 77-month low of 2.1 percent in June.
- The RBI has cut the repo rate by 100 basis points since February 2025, now at 5.50 percent.
- The central bank’s “neutral” policy stance allows flexibility for future rate adjustments.
- The RBI balances both price stability and economic growth when making policy decisions.
These potential rate cuts and ongoing policy reviews underscore the RBI’s commitment to maintaining economic stability and fostering growth in the Indian economy.
